Capital Ideas

One of the most dominant criteria used to judge a new product and technology innovation is whether it fits with the corporation’s strategy, core competencies or operating philosophy. Most companies have some explicit or implicit measures of relevance to judge a new product, process or technology innovation.  Although this criteria is expressed in different ways, it usually asks the question, “Does this new idea – if implemented properly and effectively – fit”? 

There are ample reasons for asking the question of corporate fit because eventually the corporation – or one of its business units – will need to adopt, nurture and raise the newborn innovation if it is to succeed.  The adoption, nurturing and rearing of a newborn creates a demand on resources, and it competes for management time and attention against existing operations.  So at first glance, asking the question of corporate fit makes sense.

Yet a growing number of companies are recognizing that the question of fit my have been applied too narrowly in the past.  Many of these companies are now viewing their competition in different ways.  Instead of seeing them as simply threats, many companies are viewing their competitors as potential sources of revenue.  Thus the former question of whether an innovation fits with where the company is headed is, for these companies, evolving into a question of whether the particular innovation fits with where the industry or market may be headed.

If an idea, discovery or invention conceived by a corporation’s R&D fails outside the corporation’s strategy or competencies but represents potential value to others in the industry, it is no longer dismissed as quickly as it may have been on the original criteria of fit.

The innovation may represent new intellectual capital with the potential to generate revenues without requiring the company itself to commercialize and/or implement the innovation.  Corporate fit may be giving way to “strategic industry fit” as the measure of relevance for many companies.

In his new book, Intellectual Capital, Thomas Stewart cites the experience of Dow Chemical Corporation which sought to do a “spring cleaning” when it created the position of Director of Intellectual Asset Management in 1993.  “The idea was to turn a passive function – central record-keeping for Dow’s 29,000 patients – into active management of the opportunities patients represent by cleaning up the portfolio and seeing what additional licensing revenue might be obtained from them.”

Gordon Petrash, who holds the position at Dow, found that not only did the company exploit fewer than half of its patents, but “most were orphans; no business unit was responsible for commercializing or licensing them.”  Petrash found that Dow was not alone.  Most companies have a high percentage of unused, unattended patents, which not only cost a lot to maintain, but also represent significant underutilized potential.

Dow and several other companies are starting to do something about these “ideas for others.”  Over ten years, Petrash figures, Dow will save about $50 million in tax, filing, and other maintenance costs.  Even better: by bringing valuable but unused patents out from the corporate attic, he estimates that the company will increase its annual revenue from licensing patents from $25 million (the 1994 total) to about $125 million by the year 2000,” according to Stewart.

Those of us involved in product and technology innovations may want to rethink the parochial question of “fit.”  Having good ideas for others may represent a source of revenue that rivals the revenue derived from ideas that only fit our own company’s strategy and competencies.

This article was originally published in Innovating Perspectives in September 1997. For this and other back issues of our newsletter, please visit our website at innovationsthatwork.com or call (415) 387-1270.  

Complementary Innovation

By Jim O'Shaughnessy

Targeted invention efforts complement a company’s organic innovation processes and thus have come to be dubbed “complementary innovation” or “non-organic innovation” to compare or contrast them with the former, more familiar innovation activities. The rationale for these complementary activities is rooted in the practical: no company can possibly afford to address every innovation challenge confronting it through its normal resource allocation process, yet no company can remain fully exposed to the innovation threats imposed by vigorous competition. This gap between necessity and affordability is the niche of complementary innovation.

The technique was born with a specific challenge in mind. In the early 1990s, Advanced Micro Devices was on the horns of a dilemma. It was paying Intel very substantial patent license fees it could ill afford but required the license from Intel as a market enabler. Intel’s portfolio was size dominant and AMD was compelled to true up the balance with cash.

This situation inspired the first targeted invention effort. Over a reasonable period of time AMD was able to complement the patent portfolio realized from its ongoing investments in organic innovation with new additions from this complementary process to achieve its goal of a strategic patent balance with Intel. AMD eventually cross-licensed with Intel at par. The complementary innovation strategy met its intended objective there—bulking up the size and diversity of the AMD portfolio to be found economically equivalent to Intel’s portfolio.

Similarly, at Rockwell we were disadvantaged for years in cross licensing in the field of telecommunications with AT&T and its patent successor, Lucent. We broke the paradigm in a way different from the approach we had previously adopted with AMD but based on certain principles that became evident in our work there.

Targeted invention efforts can contribute considerably to the negotiation calculus and dynamics. This can be exemplified by Rockwell’s negotiations with Lucent, assuredly a dominant party in telecommunications, where we used workshops to build quickly the size of our communications portfolio in comparison to historical organic innovation efforts. This had the added benefit of increasing patent velocity dramatically. In crafting the portfolio, and mindful of the typical lognormal value distribution that comes from historic practices, we determined to add to the portfolio based on a simple but powerful premise: patent things important to others, in this case, Lucent.

We took this aphorism one step further: determine where Lucent was vulnerable and patent into its weaknesses. Patents applied to points of vulnerability or weaknesses have greater blocking potential and can be felt by the other party to have greater relevance to its business. And, because we had a more favorable leverage ratio in the implicated market, the negotiation turned an important corner that favored Rockwell over the then dominant party.
 

This result did not occur overnight either in crafting the necessary portfolio, negotiating the cross license more favorably to Rockwell, or eventually in realizing the benefits of the investment. 

Complementary innovation is often used as a hedge. On the premise that no company can afford all the organic innovation it needs, here targeted invention can populate the portfolio with patents useful later as the company negotiates its entrée to the market otherwise foreclosed by competitor’s patents except perhaps at very high costs. The technique can also be used well in advance of market entry to begin developing a portfolio capable of sheltering the investments to be made as part of the strategic plan.
I have worked with many companies in many countries in many and diverse industries that use these and like practices to target gaps in their portfolios when assessing the capabilities of their patents to secure the desired or necessary objectives. This is a hallmark of complementary actions. 


This article was originally published in Innovating Perspectives in March 2008. For this and other back issues of our newsletter, please visit our website at innovationsthatwork.com or call (415) 387-1270.